May 13, 2014 – Do you know that for couples living to average life expectancy that there are strategies to maximize social security? If planned properly, that can translate into an increase of as much as several hundreds of thousands of dollars over their lifetime! The reality is that most retirees today are taking their benefit earlier, as much as 5 years earlier than taken in 1955.
So when is the right time to take social security? My guess is that most people would answer with a grin, “As soon as possible!” Why? Well the reasons vary: cash to fund an early retirement, the emotion of waiting, and the fear that social security will not be there when you need it.
Evolution of Social Security
The reality is that a lot has changed since social security was founded in 1935. When social security was established, it was meant as a backstop for older Americans to keep them out of poverty. The earliest you could take benefits was age 65, higher than life expectancy of the time (age 58 for men and age 62 for woman). Today, retirees can take social security as early as age 62 and a couple retiring today has about a 30% chance that one of them will reach age 90, or almost 30 years of payments.
The classic adage for retirement planning was the three legged stool: a pension, savings and social security. For the majority of us, pensions are either non-existent or were frozen by our companies years ago. Therefore, more pressure is being put on the other two legs of our retirement stool, threatening to knock us over.
For a person in good health, longevity is the greater risk versus the daily gyrations of the stock market. How does a person in good health maximize the other two legs of our retirement stool, savings and social security? The first one, savings will come down to how much we can afford to save for retirement. A shortfall in savings only leaves 2 options, spend less or work longer.
Social Security Statement
The other option is maximizing your social security cash flow by optimizing benefit strategies available to us. For a couple nearing retirement, the first step is to look at your social security statements. If you cannot remember where or when you received your last statement, don’t worry, you did not misplace it, your statement is now online and available at www.ssa.gov. You will need to set up an account, which can be started at the middle left of page (my social security tab).
When to take social security
Once you have your statement, ask yourself a few questions: how is your health, what is the age difference between you and your spouse, and can you afford to delay social security for a few months or years?
The concern is not whether the stock market will go up or down on any given day, it is whether we will outlive our savings and home equity, forcing our hand to ask loved ones for help. A strategy to mitigate this risk is delaying social security. In today’s low interest rate environment, delaying social security is the equivalent of a risk free annuity; for every year that you can delay payments, your future benefit increases 7.5% to 8.0%.
Strategies – an example
Assume you have a couple, ages 66 for both the wife and husband. Both have a working history, and the wife has been the higher wage earner. Since both have reached full retirement age for social security, it would be possible for the wife to file and suspend her benefit and the husband to start taking a spousal benefit. The spousal benefit can vary in amount; however in this case the spousal benefit for the husband would be 50% of his wife’s benefit. The husband, by taking the spousal benefit, is delaying his own benefit, allowing it to grow 8% annually until age 70. His wife, by filing and suspending, is allowing her benefit to grow 8% annually until age 70. At which point, the husband will switch to his benefit and his wife will start taking her benefit. Depending on their lifetime wages, this strategy can mean several hundred extra thousand dollars, over normal life expectancy versus this couple taking their benefit at age 62.
A final piece of advice when deciding when to take social security: do what is best for you. It is easy to get caught up with what the so called experts have to say and to rely on the well-intended words of friends. However, only you know your financial and emotional situation. Arm yourself with your social security statements, ask questions of the social security administration and if available, consult with someone knowledge who will take the time to have a conversation about your specific circumstances. This is not an easy decision but it is one that with some extra work can provide great dividends.
The example used is based only on the specific facts presented. There are many different strategies that might be used by a couple (or divorcees or widows) based on their own particular circumstances. For help finding your optimum strategy, we invite you to contact Thomas Emmerling at firstname.lastname@example.org or your existing Dopkins Wealth Advisor contact.
About the Author
The Dopkins Wealth Team
Dopkins Wealth Management (DWM) is an investment advisory and consulting firm that specializes in providing comprehensive wealth management services by incorporating tax planning, business succession planning, wealth preservation, and wealth transfer into our investment strategies and fiduciary-based solutions. Whether it’s an individual, institutional investor, Corporate 401k plan, foundation or endowment, our clients benefit from our use of an investment strategy grounded in academic research that focuses on long-term success. The key to our client’s success is our ability to understand their unique financial goals and needs, and integrate that with their need, ability, and willingness to take risk to formulate a long-term plan for financial security and prosperity. For more information, contact Thomas Emmerling, CPA CFP at email@example.com.